Taxation on Pension: What Your Need to Know

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The government offers a number of tax exemptions, exclusively to the pensioners in India. The mixed bag also has certain taxes. Pensioners in India can save towards taxes by planning their investments in advance, and prompt ITR filing provides for avoidance of income tax notices and litigations.

Millions spend their lives post the age of 60, through the pension, which is sometimes the only livelihood means that remains, in the old age. In the article, we will look towards the various Income tax provisions and Sections related to the income “Pension”.

The pension is usually paid out in India on a periodic i.e. monthly basis. The pensioners may also opt for commuted pension, which is paying of the income in a lump sum, once every year.

Pensioners should have to file taxes on both, pension and the income that they gain from other investments.

Defining Pension: The section 60, of the CPC, and the Pension Act’s Section 11, described pension as a stipend or a periodical or commuted allowance, for the past services rendered by a person to a public or private sector organization, on the basis of special, or other merits. The pension is always based on a prior agreement and ends when the employee dies.

The Actual Taxation

Just like other incomes accrued in India, the pension income is also taxed according to the Income Tax slabs fixed by the Government of India. All incomes that come under the head Salary (including Pension) are taxed upon, under the Section 192 of the Income Tax Act.

The income tax on pension amount is levied according to the below-given tables.

Income Tax Rates For Individuals Below 60 Years of Age and HUFs ( for the cases of voluntary retirement, or retirement before the age of 60 years in any other case)

Annual Pension Income

Income Tax Levied

0 to Rs 2.5 lakhs

Nil or 0

2.5 lakhs to 5 lakhs

@10%

5 Lakhs to 10 Lakhs

@20%

Above 10 Lakhs

@30%

 

Pension Income Tax Rates For The Senior Citizens (Those Having More Than 60 Years Of Age)

Annual Income Through Pension

Income Tax Levied

Income up to Rs 3 Lakhs

0 or Nil

Income between 3 Lakhs and 5 Lakhs

@10 %

Income between 5 Lakhs and 10 Lakhs

@20%

Income of more than Rs 10 Lakhs

@30%

 

Income Tax Rates Towards Pension For The  Very Senior Citizens (Those Having An Age Of 80 Years And Above)

Total Annual Income Through Pension

Income Tax Levied

Income of up to Rs 5,00,000

0 or Nil

Income  of more than Rs 5 Lakhs but less than Rs 10 Lakhs

@20%

Income of more than Rs 10 Lakhs

@30%

 

TDS Taxation On Pension

The Section 192-1 states that TDS (Tax Deducted At Source) is to be levied on all the monetary amounts that are paid by the employer, under the income head “Salary” (including Pension). Hence all the annuity pensions and the pensions arrears paid to the retired employees are taxed while their payment is made. The income paid to the family members of the pensioners is not taxed for TDS, as this income falls under the head “income from other sources”.

The responsibility of TDS taxation is on the employer (including the Central or State Government, or the private employers), and the nationalized banks (which have been entrusted with the task of paying the annuity pension). For the superannuation plans, the insurance company is responsible for the TDS deduction.

Surcharge

Apart from the income tax, the individual or HUF will also have to pay an additional Surcharge Tax, when the amount of income during a given Financial Year exceeds Rs 1 crore.

Education Cess

The Education Cess is also an additional tax, which is levied over and above the income tax, on the pension income. Its rate varies between 1%, to 2%.

Pension Received By The Family Members

While the pension received by the pensioner is placed under the head “ Salary”, it is taxed under the head” income from other sources” when it is received by the family members of the pensioner, and not by the pensioner himself or herself. In the case the un-commuted pension is received by the family members, 1/3rd of it, or Rs 15,000 is exempt from taxation (whichever is lower), under family pension deduction Section 58 (iiA). If the family members receive any commuted pension, it will be fully exempt from taxation.

Exemptions or Tax Deductions Towards The Pension Income

Section 88

Individuals and the family members of the pensioners can claim tax rebate under this section. Premium paid towards the insurance policies, PPF, infrastructure bonds, repayment of the home loans, investments made in the mutual fund pension plans, investments that have been made in the savings linked to equities, and tuition fees, among others,  are exempt from taxation, up to a limit of Rs 10, 000.

Note: Tax rebates under this particular section are not available to those who earn more than Rs 5 Lakhs a year.

Section 88 B

Senior citizens can get more tax rebate under this section, in case their age is above 65 years. The maximum rebate is Rs 20,000.

Section 89-1

When a person receives the pension in the form of Arrears, he or she is allowed some amount of tax relief under the section. If you seek relief under this section, you must file the form 10 E.

Other Exemptions

  • All pension received by the employees of the UNO, or their family members is exempt from taxation
  • The Supreme Court and the High Court judges get an exemption towards income tax, for half the commuted pension that they receive.
  • All interest earned from the PPF or Public Provident Fund is exempt from taxation. If you want to invest towards pension, these investment avenues will offer tax-free returns at the time of maturity.
  • Section 10-18-I - individuals who receive the Maha Vir Chakra, Param Vir Chakra, and other Gallantry awards are provided tax exemptions under this section
  • The Section 10-18-i- provides a tax exemption on the pension paid to the family members of individuals who have received the Gallantry Awards.
  • The Section 10-19 provide tax exemptions on the pension given to the widows, children, or their nominate heirs of the members of the Indian Armed Forces, upon their death.

Advance or Commuted Pension And Its Tax Implications

The pensioner has the leverage to receive a small percentage of the pension in advance as well. This pension, which is received in advance, is termed as the advance pension.

For instance, if your monthly pension is Rs 20,000, you can commute 10% of this pension for the next 10 years, in advance.

Calculations

Your net pension for the next 10 years: 10 x 12 x 20, 000

The amount that you take in advance @10% of total pension= 10% of 24,000, 00= Rs 2, 40, 000

For the coming 10 years, the pensioner will receive the monthly pension of 18,000. After the period of 10 years, the full pension of Rs 20,000 will be restored.

The commuted pension, which is taken by the pensioner at the time of retirement, may be exempt from taxation in certain cases. But the regular pension is entirely taxable.

  • The commuted pension is fully exempt from taxation for the Government employees
  • The commuted pension is partially exempt for the non-government employees

Form to Be Used For Filing Pension ITR

The income tax form for the pensioners is ITR 1, also known as Sahaj. You can also see the instructions related to the filling of the form here. The last date of filling the form during a given financial year is July 31st. This formis to be used by the pensioners, and by the family members if they receive the pension. Note that the form can only be used for filing ITR for the income earned through Salary or Pension, and not through business.

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